Supreme Court rules on the power of abstinence
By Nitu Poddar (firstname.lastname@example.org)
A financial creditor who is present at the CoC meeting but neither says yes, nor says no, and therefore, remains neutral by abstaining to vote, will still hold as much strength as the CoC member who says no. This is emerging from the SC ruling in K.Sashidhar vs Indian Overseas Bank & Ors.
While the question on whether or not to consider the votes of those who choose to “abstain” from voting is settled by this judgement of SC, however the open point that still remains is – what about the CoC member who “absents” himself from the CoC meeting altogether (neither present in person nor via video conferencing), and does not cast vote even on e-voting?
Question is if abstention also have the same weight as abstinence?
While the apex court in K.Sashidhar (supra) has not dealt with this point, NCLAT in Tata Steel Limited vs Liberty House Group Pte Ltd & Ors answers question on treatment to absenting CoC members. NCLAT rules that votes of only such financial creditors shall be considered as “total voting shares” who are present in the meeting. Ones who do not participate in the meeting at all i.e neither in person nor through video conferencing, voting share of such members shall not be counted at all.
Supreme Court ruling in K.Shashidhar vs Indian Overseas Bank
In this ruling, the apex court has finalised the validity of rejection of resolution plan by CoC u/s 30(2) of Insolvency and Bankruptcy Code (“IBC”) for two matters viz. Kamineni Steel & Power India Pvt. Ltd [NCLT Hyderabad] and Innoventive Industries Ltd. [NCLT Mumbai].
Both in Kamineni and Innoventive – the resolution plan was rejected since approved by only 66% of the financial creditors, when the requisite votes in affirmation was 75%. It is pertinent to note here that in Kamineni, even if the abstaining financial creditors were excluded from voting altogether, yet the voting was not meeting the 75% strength, since there was explicit rejection by more than 25% of the financial creditors.
“Dissenting financial creditor” – omitted or still exists?
The SC ruling seems to have been inspired, at least it appears on reading of Para 24, by the amendment of erstwhile definition of “dissenting financial creditor”, though it is not clear whether the apex court considered the fact that firstly, the definition currently stands omitted vide IBBI Notification dated October 5, 2018 and secondly, even when it was present, it was only for the limited purpose of erstwhile reg 38 of IRP-CP Regulations mandating priority of payment of liquidation value in the resolution plan to such dissenting financial creditors. It is to be noted that the definition of dissenting financial creditor and the priority to the same was deleted pursuant to the ruling of NCLAT in Central Bank of India vs Resolution Professional of Sirpur Papers Mills Ltd. & Ors.
66% affirmative votes “at any rate” – a strict litmus test
In the ruling, SC has made a clear remark with respect to fulfilment of mandatory 66% percent of affirmative votes in all situation. In Para 29 of the ruling, SC says:
“Concededly, Regulations 25 and 39 must be read in light of Section 30(4) of the I&B Code, concerning the process of approval of a resolution plan. For that, the “percent of voting share of the financial creditors” approving vis à vis dissenting is required to be reckoned. It is not on the basis of members present and voting as such. At any rate, the approving votes must fulfill the threshold percent of voting share of the financial creditors. Keeping this clear distinction in mind, it must follow that the resolution plan concerning the respective corporate debtors, namely, KS&PIPL and IIL, is deemed to have been rejected as it had failed to muster the approval of requisite threshold votes, of not less than 75% of voting share of the financial creditors. It is not possible to countenance any other construction or interpretation, which may run contrary to what has been noted herein before.”
If there were abstaining financial creditors, and excluding them from the voting altogether, if the plan was approved, would the decision have been different? One does not get that clear answer from the Apex court. However, it seems that the arithmetic to be done is to apply the percentage of affirming creditors to the total of the voting shares, including those who have not voted at all, or even after giving the chance to vote by e-voting, those who did not come forward.
CoC’s wisdom is paramount
The apex court has clearly held that the approval by the CoC is mandatory, and use of the word “may” in section 30(4) does not mean the provision is directory. In para 26 of the ruling, SC says:
“In that, the word “may” is ascribable to the discretion of the CoC to approve the resolution plan or not to approve the same. What is significant is the second part of the said provision, which stipulates the requisite threshold of “not less than seventy five percent of voting share of the financial creditors” to treat the resolution plan as duly approved by the CoC. That stipulation is the quintessence and made mandatory for approval of the resolution plan. Any other interpretation would result in rewriting of the provision and doing violence to the legislative intent.”
Further in Para 33, the ruling mentions:
“Besides, the commercial wisdom of the CoC has been given paramount status without any judicial intervention, for ensuring completion of the stated processes within the timelines prescribed by th I&B Code. There is an intrinsic assumption that financial creditors are fully informed about the viability of the corporate debtor and feasibility of the proposed resolution plan. They act on the basis of thorough examination of the proposed resolution plan and assessment made by their team of experts. The opinion on the subject matter expressed by them after due deliberations in the CoC meetings through voting, as per voting shares, is a collective business decision. The legislature, consciously, has not provided any ground to challenge the “commercial wisdom” of the individual financial creditors or their collective decision before the adjudicating authority. That is made nonjusticiable.”
Role of NCLT wrt approval of resolution plans
Very importantly, the Supreme Court has commented on the powers of the adjudicating authority. On receipt of a CoC approved resolution plan, the NCLT is only required to satisfy itself that such plan meets the requirements specified in Section 30(2). No more and no less. This is explicitly spelt out in Section 31 of the Code. NCLT cannot turn down a CoC approved plan for any reason beyond non-compliance of section 30(2). In Para 33, Supreme Court commented:
“The legislature has not endowed the adjudicating authority (NCLT) with the jurisdiction or authority to analyse or evaluate the commercial decision of the CoC muchless to enquire into the justness of the rejection of the resolution plan by the dissenting financial creditors”….
In Vinod Kothari & Sikha Bansal Guide to Insolvency Law, it is commented as follows as regards the role of NCLT with respect to resolution plans:
“…Once the committee has decided to approve a plan, the scope for discretion of the adjudicating authority is very limited.
… the spirit of the Code is largely to vest discretion with the creditors in the process of resolution. There is a limited role that the adjudicating authority has. In many of the sections, there are mandatory provisions for orders of the adjudicating authority, indicating that the scheme of the law is to put the process in an auto-pilot, credit-driven mode.”
As regards the amendment in section 30(4) made effective from November 23, 2017 requiring financial creditors to consider “feasibility and viability” of the revival plan, the apex court clarifies that the intent of the amendment is merely to list out the factors that financial creditors are expected to bear in mind while taking their decisions on resolution plans. The intent of this amendment is not allow adjudicating authorities to call to question the decisions. Also, it is to be noted that, this amendment, being in the nature of clarification, is prospective in implementation.
Role of NCLAT as Appellate body
The apex court has also clarified the scope of the Appellate jurisdiction of the NCLAT.A NCLT approved plan can be challenged only on the grounds mentioned in 61(3). However, its rejection by NCLT can be challenged under any ground as mentioned in 61. In para 37, the SC says:
“Indubitably, the remedy of appeal including the width of jurisdiction of the appellate authority and the grounds of appeal, is a creature of statute. The provisions investing jurisdiction and authority in the NCLT or NCLAT as noticed earlier, has not made the commercial decision exercised by the CoC of not approving the resolution plan or rejecting the same, justiciable.”
Power and duties of resolution professional wrt section 30(2)
In para 44 the SC has given a detailed account of what are the powers of the RP, the powers of the coc and the powers of the nclt
“Indubitably, the legislature has consciously not provided for a ground to challenge the justness of the “commercial decision” expressed by the financial creditors – be it to approve or reject the resolution plan. The opinion so expressed by voting is non¬justiciable.”
“Concededly, the inquiry by the resolution professional precedes the consideration of the resolution plan by the CoC. The resolution professional is not required to express his opinion on matters within the domain of the financial creditor(s), to approve or reject the resolution plan, under Section 30(4) of the I&B Code. At best, the Adjudicating Authority (NCLT) may cause an enquiry into the “approved” resolution plan on limited grounds referred to in Section 30(2) read with Section 31(1) of the I&B Code.
 https://nclat.nic.in/Useradmin/upload/19807396735c58251eedb58.pdf Order 04-Feb-2019